Let’s talk about failure.
Not of the “fail-fast-fail-often” kind that is a constant cliché in startup circles. But rather, the real, cold, hard failure that is a dreaded part of any founder’s existence. The kind that gives you cold sweats in the middle of the night when you’re building a business (pro tip: there is no pro tip).
Failure may not be the desired option, but it’s always just a pivot away for any young business. The well-trodden statistics bear this out. According to Industry Canada, just under half of all startups fail within their first five years of business; that downward trend continues over time. For every Shopify, there are scores of young Tobi Lütke disciples who weren’t able to make it work. We tend to leave those ambitious and brave founders in the dustbin of history.
Which is why I was so delighted to meet Melinda Jacobs last week at the Banff Forum in Yellowknife, N.W.T. Melinda is a tech entrepreneur who argues that the life cycle of the innovation economy—from angel rounds, to accelerators and seed rounds, to Series A, B, C and exit—is missing one key element: failure. Each step is built on the assumption of success, and success can’t always be assumed.
So what can we do with the just under 50 per cent of founders who fail? Or, for the startups that do succeed, the 50 per cent of founders who get booted from their role after three years? Jacobs argues that we need spaces for people to discuss transitions and failures as much as we need accelerators to provide resources and networks at the beginning of a company.
She calls these spaces “decelerators.”
“Running a business is a highly methodical experience and it teaches you to think quite linearly. Part of the transition would be introducing resources or people or experiences that force you out of the box, to think in different ways and to consider other possibilities for yourself as both a person and as an entrepreneur,” Jacobs told me.
There are three reasons why this makes sense.
First, failure is a prerequisite for success.
As Dan Senor and Saul Singer noted in describing the Israeli entrepreneurial spirit in their book Start-up Nation, “most local investors believe that without tolerating a large number of these failures, it is impossible to achieve true innovation.”
A 2006 Harvard University study, also cited in Start-up Nation, shows that entrepreneurs who have failed in their previous enterprise have an almost one-in-five chance of success in their next startup, which is a higher success rate than that for first-time entrepreneurs and not far below that of entrepreneurs who have had a prior success.
Second, the failure of a firm that’s on the verge of collapse is better than the alternative—just hanging on.
As Deloitte outlined in a recent report, Canada has a “zombie” problem. One in six publicly-traded firms that are more than 10 years old lack sufficient revenue to cover interest payments on their debt.
While the report didn’t look at private venture capital, it speaks to how inappropriate insolvency structures keep companies intact when a competitive marketplace would have forced them to liquidate or restructure.
“Being able to stay in business isn’t the same as building a company that grows, adapts, and continues to win as the years pass by. Yet many Canadian companies seem to be settling for survival. They’re not growing. They’re not exiting. They’re just … existing,” reads the report.
Too many zombie firms can cause stagnation in the economy.
Third, these decelerators could open up the job market to talent that is now being left behind.
We know that we have a talent shortage in the Canadian innovation ecosystem.
How many companies would welcome the cross-functional skills of an entrepreneur who has gone through all the ups and downs of running a company, managed and led a team of people and who has likely worn many hats—from bookkeeping to sales and operations to fundraising?
There are even different ways to define failure, and therefore different things to be learned from it.
Jacobs thinks decelerators could be normalized in the same way that accelerators are.
“It could become part of the funding packages of VCs or what have you, because they know 90 per cent of their ventures are going to fail, and they also know that repeat entrepreneurs are going to try again and be successful.”
We don’t need to celebrate failure, but we should at least be prepared for it.